ECB LTRO Cramdown Question

We saw last WSW that volatility was going “way low” in anticipation of “things to come”.

Tomorrow the European Central Bank ECB is releasing information about participation in the latest round of the LTRO Long Term Refinance Operations, which is what they call the process of soaking the German Taxpayer (and any other fools they can find) to pay for the Greek Socialism excesses.

The “News Flow” is that a $750 Billion participation will be the pivot point. If less than that many Greek bonds stay bailed out, it means Greece will be in ‘constructive default’ as they will not have enough for a double digit billions “repayment” due in a few weeks… (A Wag would ask “is it really a repayment if you are borrowing the money to do it from the same folks?”… but maybe they are not exactly the same folks…)

Everyone is whistling past the graveyard that that the number will be enough to cover. There is a whisper that some percentage of the bond holders will suffer a “Cram Down”, where they change the terms of the loans and accept that, or lose everything in a bankruptcy proceeding. (That’s a polite way of saying the lenders are being blackmailed in the negotiations to either keep lending and keep Greece afloat, even if it’s a money loser, or lose even more in a default). Over $750 B participation, Laissez Le Bon Temps Roulet “Let the good times roll”… Under that number ‘enough’ and it’s OMG… (Various folks have different limits, $650 Billion being common) Why all these nice round numbers are not in Euro is an interesting question, but I’m mot going to explore that here.

I’m having trouble deciding which of these two scenarios is worse. Let Greece recognize that it’s in default. Let the bankers and other lenders take their wounds. Let the German Taxpayer off the hook for “more”, but losing more of what’s already been given. Destabilize European banks, but recognize they were fishy all along if bailing out Greece is the “best” option to avoid EuroBancruptcy…

In any case, a finding of constructive default on Greek Bonds (i.e. a sloppy Cramdown) will result in triggering of CDS Credit Default Swaps (or ‘insurance’ on the Greek bonds). That is likely to cause all sorts of financial grief. At the same time, loaning more than $750 B would likely cause a rise in gold (as folks run from yet more bailout inflation) and a drop in stocks (as folks take a ‘risk off’ posture). That’s per a gentleman named Lawrence McDonald, a Sr. VP from Newedge if I caught his intro correctly.

Or continue the fiction that everything is Just Fine, until the NEXT round of Greek Riots on “austerity” and “Soak The Germans to save French Banks” when they will be further in debt, have even less Tourist Dollars coming in, and be even less interested in “austerity”.

Fast Money

The traders on Fast Money include some very good and very bright folks. I’d not bet against them.

Gartman specializes in commodities most of the time. He is taking a position of “Long Gold, Short Oil” (and I can see that. While oil services and refiners are likely making money hand over fist off the oil / refined products spreads and non-US Drilling going gangbusters at over $100/bbl, oil itself has run up to near the usual ‘demand destruction’ point. Long run it will likely hit $120 $140 / bbl, but after the recent run it would be likely to ‘take a dip’ on bad economic news. Part of why in the WSW posting I suggested oil services and refiners, but not a ‘long oil commodity’, as likely to do well.) He’s expecting Euro instability to drive up gold.

Guy Adami “The Negotiator” long before Shatner… sees a ‘double bottom’ in SLW Silver Wheaton and is going long silver. (Via PAAS or as silver).

I’d been more generic in saying “precious metals” which includes Platinum and sometimes Palladium, but as they are used in catalysts as well, they sometimes move with expected economic growth and sometimes with political driven precious metals. So they are specifically staying away from the more “industrial special metal” (though silver is arguable becoming just that too).

Karen Finerman is generally a longer term investor and more cautious. She is buying TLT, so going long US Bonds. (Which tend to rise when there is risk or fear elsewhere in the world).

Again, a reminder, this is Fast Money TRADING, not slow money investing… So these folks are generally saying they expect some negative / destabilizing worry event, not honey and roses in the next week or two. (The typical kind of time scale they use, though occasionally they will run out to months on value trades; rarely to the 1 year horizon and then often just for Karen.)

A Note On Time Scales

Remember that “fixing your time scale” is critical here. What these folks are doing is placing bets about THIS News Event. Not making investments for a 6 month time horizon. I tend to look at a “couple of months” horizon for most trades ( i.e. I’m a trend trader, mostly, with occasional swing trades – picking a pivot point – based on longer trend reversals; and only rarely do event driven trades such as day trades or short time horizon swing trades).

So a comparison of “my expectations” vs “their expectations” may look like things are in conflict when they are not. We’re just looking at different time scales.

So I’ve said “Refiners and Oil Services look interesting”. That’s over a many months time scale. Similarly I expect oil to ‘hold up’ for a few years as economies pick up demand. None of that is in conflict with a Fast Money Trade timing. In fact, I watch Fast Money to help time my entries and exits.

How To Evaluate

I’m expecting a ‘dip’ in stocks to present a buying opportunity. Similarly I’m expecting “inputs” to industries to have growing demand over time as the global economy heals. Oil too. However, oil has already run up a bunch and that is typically followed by a “dip”. So saying I’m interested in oil and oils does not mean I think the time to own them is Right Now. It means it is time to WATCH them for a buying opportunity.

Some time ago I said ‘metals’. What Fast Money is saying is that the ‘time’ is about now. Just in the last day or two I’ve said “Hmmm… Oils…”, that means “watch now” as I have to give more ‘advance notice’ than a TV show with immediate viewers… What Fast Money is saying is “expect a dip in oil and stocks”. That is not in conflict; that’s the “Buy the dip” that I’m saying will be a good strategy longer term.

Overall the vision is the same. There is a Risk Pivot Point tomorrow. It will likely drive precious metals up (so you want them, and cash, now) and stocks and oil (the commodity) will likely drop for a short while, then recover. As soon as the “dip” has a deep high volume day, then stops going down, that’s your ‘buy point’. Usually about the same time, as the rotation from “risk off” to “risk on” happens, both US Bonds and Gold take a ‘dip’. So the major trade here is a “risk off” trade into US Bonds / Gold / Silver / Cash, then a “risk on” trade out of them and into oil, oil stocks, commodity metals, and general market stocks.

Of course, the whole thing could go dramatically some other way depending on what the ECB announces and what Germany and Greece agree to do. (That’s why I usually don’t do news event driven trades, it’s a sort of ‘double or nothing’). In those cases it is only really safe to ‘buy volatility’ via options. You buy options where the increased volatility event will raise the volatility premium… but that’s a very esoteric trade that most ‘plain folks’ are not prepared to do.

There you have it. Likely “risk off” event, then a rotation back into “risk on”, pivot on the news tomorrow, and if the news is contrary to a “risk off” event, everything will go ‘exactly backwards’ from the predictions here. (i.e. if it’s a “risk on” decision from the ECB, well, stocks will rise and cash / gold would not do so well…)

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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11 Responses to ECB LTRO Cramdown Question

  1. Hal says:

    The pure volatility play would be VIX call options.

  2. adolfogiurfa says:

    @E.M.: If you are not a billionaire I would advice you to have some savings in the peruvian currency (“sol”) which is currently reevaluating against the dollar currency (now 1 US$=2.68 soles). Look at the saving rates (as displayed at the National Banking Superintendency:
    By the end of this year, it is very probable that the rate of exchange would be at 2.50 per dollar, that would be a 6.7% which you will add, say to a rate of 7%=13.7%

  3. adolfogiurfa says:

    @E.M: Any economical “adjustment”, as you know, it is “wisely” programmed to happen in “convenient” dates (I don´t mean markets but those adjustments in currency/economic policies). So you may judge when it will begin the regressive count.

  4. E.M.Smith says:

    Well, The Bernanke spoke today and the markets took it to mean that QE3 was ‘off the table’ (as it was not mentioned) and that things are getting better.

    Gartman on Fast Money said he swap positions 1/2 way through the day (i.e. abandoned his Gold Buy and sold instead).

    Oil dropped. and Stocks continued up.

    It’s all ‘sort of a Risk On world’

    Basic Thesis of The Bernanke Speaks, market drops was violated by him not saying anything bad…

    ECB announcement ought to be next (and EU / Euro / Greece) no looking good.

    At any rate, the statements in the posting about “what is likely” and “directions of bets” is now reversed (due to markets going positive in stead of negative on the news).

    At this point I’m doing more of a ‘back to cash’ as we see what the EU does…

  5. kuhnkat says:


    you are probably aware of this:

    Wondering if you could do a post on what you think it means??

  6. Pascvaks says:

    Sell high and buy low. The Global Market should be based upon simple, honest rules of the road. Never felt comfortable with what it really was, how low it actually was from the high ideal, or that I actually had the time to keep track of its gyrations. Anyway, as a polisci/history guy, I think I much prefer the Long over the Short “View”, and I continue to feel that while there is always opportunity to make a little here or there if you‘re smart and quick and lucky, that the greatest danger is in the “stupidity” of the old polisci/history guys like myself who are hell bent on bankrupting the entire system yet have absolutely no idea that that’s what they’re actually about. The kids with the untested bright ideas, and the old folks with the twisted and power hungry little minds bent on leaving a legacy, and their name in a history book, are the movers and shakers of the modern world and the global market. As much as the “charts” say so-and-so, the media is telling me today is 2 March 1929. Governments and trust fund managers are listening and watching for any indication of trouble with the market, I have a feeling they’re not listening to the media about anything that’s unrelated to the market, like the news. I so hope that by the time October comes, a devastating power failure in each of the political and financial capitals of the world forces these people to open their windows, and everyone on the ground with a cell phone captures the leaps of final desperation.

  7. E.M.Smith says:

    The EU LTRO announcement was “more easy money” and more propping everything up.

    I’m going to have to ponder all of this some more. Kuhnkat, that link too.

    We’ve just got so many central banks and governments doing various manipulations that it’s become quite hard to weight them against each other.

    News Flow on Fast Money is talking about the Russel 2000 vs market leaders “gap”, so I think I’m actually being a bit ahead of them this time. ;-)

    So I was at least 2 days ahead on a “start to worry” post and then had a “Russel falling behind” with weak breadth and volume in the market.

    Well, maybe I need to watch them less and listen to me more ;-)

    I’m going to do another “markets review” this weekend and come up with a summary of some sort, if not a full WSW posting.

    I’m pretty sure the ideas so far (metals, selected stocks and markets) are still valid, along with the ‘be broadly worried about US stocks” and probably the same on European markets.

    We’ll see…

  8. adolfogiurfa says:

    It seems that now taxation it is just a disguise to justify faked money. If it could buy metallic gold, at a real exchange rate, gold should be, at least, at 10,000 US dollars per ounce.,. Don´t you think so? or I am being too disingenuous?
    Easy money= “stoned” markets?

  9. E.M.Smith says:


    Through most of history, an ounce of gold has bought a “Mans suite of fine clothing”. Today, I make that at $1500 to $2000. Not $10,000

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